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CFTC’s O’Malia Criticizes ‘Mad Rush’ On Swaps Rules

Commissioner cites inconsistency in some regulations; says agency should release guidelines for implementation.

The U.S. Commodity Futures Trading Commission is overreaching in its Dodd-Frank Act rulemaking, undermining efforts to provide certainty to the swaps market, according to Scott O’Malia, a Republican commissioner.

The CFTC has taken shortcuts and reached inconsistent outcomes on regulations including those for market-information databases and the international reach of the new rules, O’Malia said in remarks prepared for delivery today at the University of Notre Dame Business Law Forum in Indiana. The agency should release guidelines for implementing the rules, he said.

“In a mad rush to implement the rules, the commission quite often forgets to make sure that all these rules should work together to achieve the overall objectives of enhancing transparency and reducing systemic risk,” O’Malia said. “It’s not easy to comply with regulations when the goal posts are constantly moving.”

The CFTC and Securities and Exchange Commission are writing regulations for the global swaps market after largely unregulated trades helped fuel the 2008 credit crisis. Dodd-Frank, the 2010 financial-regulation overhaul, is designed to have most swaps guaranteed by central clearinghouses and traded on exchanges or other venues to increase transparency.

The CFTC is working to complete many of the regulations by the end of the year. Under the current timeline, swap dealers probably will register with regulators by January. JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Citigroup Inc. and Morgan Stanley controlled 96 percent of cash and derivatives trading for U.S. bank holding companies as of March 31, according to the Office of the Comptroller of the Currency.

The CFTC probably will release a series of no-action letters and exemptive relief from rules before some begin to take effect Oct. 12, according to Jill E. Sommers, the other Republican commissioner on the five-member panel. “There are a very long list of compliance problems,” she said today at a Security Traders Association conference in Washington.

Questions about rules already completed as well as those surrounding a mandate to guarantee swaps at clearinghouses are being considered by the CFTC, Sommers said. Rules governing trading facilities that have yet to be completed and “may not actually even come until next year,” she said.

O’Malia renewed his request that the agency produce guidelines for implementing swaps rules.

“I urge the commission and the National Futures Association to provide clear and consistent guidelines for applicants to follow,” he said.

Inconsistent Outcomes

The CFTC has reached inconsistent outcomes in the process for registering swap data repositories because agency employees have adjusted rules after they have been approved by commissioners, O’Malia said. Employees have shifted and sped up requirements for how quickly data must be reported to the public, according to a letter from CME Group Inc. to the agency.

“When CME asked to see these new directives in writing to ensure there was no miscommunication, division staff advised they did not have, and we should not expect to receive, a written confirmation of these new directives,” Timothy R. Elliott, executive director and associate general counsel at CME, said in the letter.

O’Malia said he is frustrated that rules are being adjusted after they have been approved and with deadlines looming. “If that is what has transpired, I can assure you this is not good government,” he said.

The CFTC has approved two databases, DTCC Data Repository LLC and ICE Trade Vault LLC, to collect information on interest-rate, credit, energy and other swaps to improve access for the public and regulators.

There are three or four additional applications to become swap data repositories, CFTC Chairman Gary Gensler said in a telephone interview yesterday.

The agency has also published a vague set of guidelines for the international scope of its rules that applied “unprecedented regulatory reach” and also “trample on foreign regulatory authority,” O’Malia said.

The CFTC’s June proposal could lead to conflicts between regulators, according to letters submitted to the agency by overseas regulators. Letters were sent by the U.K.’s Financial Services Authority, European Commission, European Securities and Markets Authority, Financial Services Agency in Japan, the Bank of Japan, Bank of France and Swiss Financial Market Supervisory Authority.

The Hong Kong Monetary Authority, Monetary Authority of Singapore and the Comissao de Valores Mobiliarios, Brazil’s national securities regulator also submitted letters.

Confused Objective

“This rule couldn’t do more to confuse the objective of coordinated global oversight,” O’Malia said. The CFTC should re-draft the regulation and release it as a formal rule proposal instead of interpretive guidance, he said.

Bart Chilton, one of three Democrats at the CFTC, said the agency should quickly complete regulations for governing conflicts-of-interest at clearinghouses and trading platforms.

“The time has come, and we need to get a final rule out there that does what I’ve been talking about: make sure that banks don’t put their own interests in front of their customers,” Chilton said in a remarks prepared for delivery at the Hard Assets Investment Conference in Chicago.

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